Health Bill Extends Wage Tax to Investments

WASHINGTON - High-income families would be hit with a tax increase on wages and a new levy on investments under President Barack Obama's health care overhaul bill.

For the first time, the Medicare payroll tax would be applied to investment income, beginning in 2013. A new 3.8 percent tax would be imposed on interest, dividends, capital gains and other investment income for individuals making more than $200,000 a year and couples making more than $250,000.

The bill also would increase the Medicare payroll tax by 0.9 percentage point to 2.35 percent on wages above $200,000 for individuals and $250,000 for married couples filing jointly.

The new tax on investment income is higher than the 2.9 percent tax proposed by President Barack Obama. House Democratic leaders increased it so they could reduce the impact of a new tax on high-cost health insurance plans strongly opposed by labor unions.

The 40 percent tax on health benefits would be delayed until 2018 and would apply only to premiums exceeding $10,200 a year for individuals and $27,500 for families.

The search for revenue to pay for health care has been made more difficult by Obama's campaign pledge not to raise taxes on the middle class. The result is a bill that would raise a total of $438 billion in new taxes over the next decade, mainly from high-income taxpayers and fees on the health care industry.

Taxing the rich to pay for health insurance would represent a significant departure from the way Americans have financed safety net programs in the past.

Both Social Security and Medicare are supported by broad-based payroll taxes. Although the rich pay more -- they have bigger incomes -- the burden is shared by the middle class and even the working poor.

"This is the problem with a $1 trillion bill," said Rep. Dave Camp of Michigan, the top Republican on the House Ways and Means Committee. "They've got to find all these ways to pay for it."

The $940 billion, 10-year health care bill would extend coverage to an estimated 32 million people who now lack it, while reducing the budget deficit by $138 billion over the next decade.

The bill envisions billions in savings from Medicare to help finance expanded coverage.

Democrats argue that high-income families fared well under tax cuts enacted in the past decade, so it's time to pay up. Republicans argue that many of those taxpayers are small business owners struggling to stay afloat.

"I have no problem with it," Rep. Jim McDermott, D-Wash., said of the new Medicare taxes. "Income is income. Most Americans work by the hour, get paid by the hour. Some other people get their money in other ways but it's still income."

Medicare payroll taxes traditionally have been low and predictable: a 1.45 percent tax on wages, paid by both employers and workers. The money is taken out of workers' pay before they see it. There are no forms to file, no deductions to claim.

Under the new health care bill, married couples with combined incomes approaching $250,000 would have to keep tabs on their spouses' pay to avoid an unexpected tax bill. Those with investments would have to pay even more attention to the income they earn from interest, dividends and capital gains.

"Unless they are very conscientious folks who constantly monitor their income tax withholding, they're going to have quite a surprise when they go to file their income taxes," said Jeffrey L. Kummer, director of tax policy at Deloitte Tax LLP.

The new Medicare taxes would raise an estimated $210 billion over the next decade. The new tax on investments would be on top of capital gains and dividends tax increases already proposed by Obama. The president wants to increase the top tax rate on capital gains and dividends from 15 percent to 20 percent. If Congress goes along, the new top rate would be 23.8 percent in 2013, when the health care taxes kick in.

Projected revenues from the tax increases over the next decade, according to the nonpartisan Joint Committee on Taxation:

-- The new tax on high-cost insurance plans, $32 billion.

-- A fee on the makers and importers of brand-name drugs, $27 billion.

-- An excise tax on the makers and importers of certain medical devices, $20 billion.

-- An annual fee on health insurance providers, starting in 2014, $60 billion.

-- The repeal of a tax loophole that could allow paper manufacturers to get tax credits for generating alternative fuel in the paper making process, $24 billion.